Over the last several years, a narrative coming out of the West has claimed that China’s manufacturing is at “overcapacity”, so by implication, that’s not good for the rest of the world. A corollary of this thesis is that the “overcapacity” was by design of the Chinese government (and hence the State-owned enterprises). So, this is “part of the plan”.

The most frequently cited examples are electric vehicles (EVs), solar panels, and photovoltaic equipment, batteries, steel, and wind turbines. The narrative goes like this: Overcapacity, which is State-planned and State-driven, will flood the market, prices will come down, and many other businesses — especially those in the West — will not be able to survive; therefore, this is not good for the world.

But is that so? Does China produce at “overcapacity”? How much is the Chinese State involved in the buildup of the so-called “overcapacity”? What implications does the current situation have for the rest of the world?

The most oft-cited example of commentators spinning this narrative is China’s EVs. They’d say: China’s production capacity of EVs far outstrips its own demand, flooding the market with cheap products, chasing out Western automakers that cannot compete with Chinese prices, and as a result, Western companies are being squeezed out. This is fundamentally government behavior designed specifically to take over the world (through unfair practices), leaving no other survivors, so this practice must stop, they’d assert.

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Around 2012, the Chinese government began to make it a key national policy to develop EVs. Many people have tried to trace why this policy was designed and how it was implemented. I won’t repeat their reasoning. However, the wish to create new pathways in the automotive industry so that innovations can be attempted, new manufacturing and the associated ecosystems can be created, and the environment can be improved is clearly behind the establishment of this policy.

Capable local governments across China, such as Beijing, Shanghai, Shenzhen, Hangzhou, Guangzhou, and Chengdu, played a key role in supporting the early stages of EV adoption between 2010 and 2015 — offering local subsidies, free license plates, and free charging, but often prioritizing locally manufactured EVs. This was especially visible in public procurement, where most electric buses and government-fleet vehicles were sourced from local manufacturers. For example, Shenzhen provided additional subsidies on top of national incentives in 2013 — 60,000 yuan ($8,360) for locally produced pure electric passenger vehicles. Other cities, such as Shanghai and Hangzhou, also introduced generous local subsidy programs and policy incentives during this period, often linking benefits to vehicles made by local or regionally based manufacturers.

Once the EV policies were made, many Chinese entrepreneurs saw an opportunity and decided to get into the EV market. Clearly, many were automakers to start with. They’d leverage their auto expertise to build their capability in the EV industry. The fast movers were the likes of BYD, Geely, Chery and Great Wall Motor. They are all privately owned companies or State-owned enterprises (SOEs) that had been privatized. These companies are often driven by their leaders’ entrepreneurial zeal and are often swift in their action.

At around the same time, Chinese entrepreneurs — many of whom didn’t have any or much previous experience or expertise in the auto industry, let alone in the EV industry — saw the potentially huge opportunity and decided to start their own operations in EVs. The most well-known cases are the so-called “new forces” — XPeng (founded by He Xiaopeng), NIO (founded by William Li) and Li-Auto (founded by Li Xiang), whose founders all came from the internet sector. There were plenty of other similar cases too.

Though slightly slower, Chinese SOE original equipment manufacturers (OEMs) also started to participate in EV manufacturing. However, they are not permitted to dominate the market and must coexist with the private companies.

The foreign OEMs were the slowest to react. Of course, they have been in the market for a long time, and many have built prominent positions in the traditional auto market. And many of their senior staff have been based out of China often for more than a decade. Yet most of them were slow to recognize the speed and intensity of the rise of the EV sector in China. Even if the local team informed people in the global headquarters of the changes, they did not react in time. As a result, foreign OEMs were generally ill-prepared for the change.

As these various OEMs built out their capacity, the capacity increased rapidly. Chinese manufacturers are also well-known for their ability to manage their costs relative to international counterparts.

According to China Association of Automobile Manufacturers (CAAM), in 2014, China’s overall EV production output was about 83,900 units, it surged to around 340,000 units in 2015, and reached 12.89 million units by 2024.

Clearly, capacity has been building up very rapidly. This is the result of a relatively large number of OEMs, regardless of the type of ownership, which saw the market opportunity at around the same time and decided to participate in competing for a piece of the fast-growing pie.

This was not a State-planned move; rather, a response to the principles of the market economy that China has embraced — and which the West favored along with China — since its reform and opening-up started.

This is similar to how the United States (US)’ automotive industry and the oil and gas industry developed during their early stages, where a large number of companies saw an opportunity and took part in chasing market share in a crowded space.

After a decade of development, some of the initial EV players in China have been marginalized and others have been squeezed out. This is only natural. Again, most of these players are private entrepreneurial companies.

As they have gained a presence in the market, Chinese companies have extended their products range. Most of them first take part in the mass market and the midmarket. However, many of them have also begun to produce very high-end products with higher price tags. In general, compared to Western OEMs, Chinese automakers offer a different set of price-value trade-offs with their products, often making them more affordable and offering consumers more choices.

For instance, BYD competes across the entire price spectrum — from its entry-level Seagull priced at 69,800 yuan, to its midmarket Han priced at 219,800 yuan, to its high-end Yangwang U9, priced at 1.68 million yuan. Xiaomi’s SU7 Max, which industry analysts say is comparable to the Porsche Taycan Turbo in terms of performance, is being sold for around 20 percent of the price of Taycan.

According to CAAM, China’s EV production in 2024 was 12.89 million units while sales were 12.87 million units. However, during the China EV100 Forum in March 2025, Su Bo, former vice-minister of industry and information technology, said that China’s built-up EV production capacity had already exceeded 20 million units — reflecting a capacity utilization rate of just 64.5 percent. While the leading players — such as BYD, Tesla, Chery, and Xiaomi — operated at over 90 percent capacity, 31 out of 78 automakers faced severe underutilization with fewer than 5,000 units produced per month.

However, if we look at the total global demand, we see a different picture. The global sales of EVs in 2024 were 18.24 million units, while China’s total EV production was only 12.89 million units.

In fact, one could say that Chinese EV suppliers are offering the rest of the world — especially the Global South countries — the choices in EVs that consumers in these countries did not get previously. The supply would turn latent demand into real demand, offering products and price ranges that were not possible before.

In fact, Chinese auto OEMs have started to export substantially since EVs have gained traction as a viable and scalable sector. In 2024, China’s total automotive exports were 5.86 million units, of which 1.28 million units — or around 22 percent — are EVs, according to CAAM. Chery alone exported 1.14 million vehicles in 2024.

So, is there an overcapacity problem in the EV sector in China? And is it being masterminded by the Chinese government?

China has developed a composite governance system in which the central government sets the country’s directional strategy and policies, and businesses make their strategic and investment decisions based on the direction signaled by the central government. However, many businesses, especially those that are smaller and privately owned, cannot easily survive – especially during the early stages of their development. Often, local governments that have financial resources would provide support to businesses so that they would have a better chance to grow and to thrive. These local governments often provide funding and incubation support, linking companies with the ecosystems that the local governments have built in both the supply chain and in customer networks.

After almost five decades of reform and opening-up, in most industrial sectors market-economy principles are being adhered to within context of China’s development. Hypercompetition happens all the time as entrepreneurs perceive the same opportunity at around the same time. The equation of price-value trade-offs is often rewritten as companies compete intensively, build extensive and efficient supplier ecosystems and innovate rigorously.

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The very best will survive and will become leading companies not only in China but often in other parts of the world. The mediocre ones could be left out. And that’s part of market mechanism. And increasingly, these leading Chinese companies are becoming key targets for partnerships for leading Global South countries looking for new pathways to their industrial development.

The world will see a wider range of product choices and price-value tradeoffs, especially with the lower-price products. Consumers will also enjoy the benefits of tech innovations in both hardware and software.

So, does China have an overcapacity problem or not?

The author is founder and CEO of Gao Feng Advisory Co, a strategy and management consulting firm with roots in China.

The views do not necessarily reflect those of China Daily.